In this post, we'll highlight that this broadening participation and flight towards risk-assets is more than just a one-week phenomenon. We've seen this type of price behavior in some asset classes for over a month now.
In early May we outlined the "Five Bull Market Barometers" we're watching to identify the beginning of a new bull market in stocks.
If you haven't read our initial post linked above, we'd encourage you to check it out so you understand what the rationale behind these five indicators is.
It's also worth pointing out that last week we noted that despite the slight improvement in two of these measures, zero of the five were above their key risk levels. Despite that, the market was telling us that the short-term momentum remained to the upside and our long ideas were working well.
After a couple of strong weeks in the market, let's take a look and see how these longer-term indicators have fared.
In recent weeks, we've witnessed a powerful rotation as many of the secular laggards have assumed short-term leadership positions.
In today's post, we're going to take a stab at using a new visualization tool in order to illustrate this recent changing of the guard.
This scatter plot is comparing the maximum drawdown from 52-week highs to the March lows (Y-Axis) with the short-term performance off of the May 13th low, among all of the 150+ Dow Jones Industry Indexes. The plot-sizes are based on how large the current drawdown is... In other words, the bigger the dot, the bigger the drop.
This is a market of stocks, and not just a "stock market".
All of these Indexes, from the Dow Jones Industrial Average to the Russell2000 Small-caps, are made up of components. There are 30 stocks in the Dow and 2000 stocks in the Russell2K, for example.
Are more of them going up? Are more of them making new highs? Are more of them showing bullish momentum characteristics? Are fewer and fewer components doing these things as the indexes make new highs? What about in downtrends? Are more stocks confirming the new lows in the indexes or are fewer and fewer stocks making new lows and showing bearish momentum characteristics as the market makes new lows?
The answers to these types of questions is what we call, "Market Breadth Analysis". There are a lot of ways to do this on all sorts of different time horizons. In this lesson we go over all the methods we use to decipher market breadth, which can be used by both individual traders and the largest financial institutions in the world.
We've been writing about how the momentum is to the upside for the last few weeks, but now prices are testing overhead supply across all the major Nifty indices.
If you haven't read our last few posts we'd highly encourage it, as they outlined our shorter-term views within the context of the long-term trends.
If you're all caught up, then let's take a look at the levels we're watching in the Nifty 50 and other indices.
Here's the Nifty 50 running into overhead supply near 10,000. Momentum failed to reach overbought territory despite the more than 35% rally since the index's March lows.
Thanks to everyone for participating in this week's Mystery Chart. It was a bit of a layup, as most of you were bullish, recognizing the powerful failed breakdown and follow-through back above critical former support.
We would agree and like this chart for a counter-trend move right now as well. But the reason we chose it was really for informational purposes, as we are seeing continuation patterns resolve higher all over the globe right now.
The more of these patterns that resolve to the upside, the stronger the weight of the evidence builds in favor of other consolidations working themselves out higher as well. We are seeing this across all areas of Domestic and International Equity Markets, many of which we'll highlight in this post.
Consolidations tend to resolve in the direction of the underlying trend. But when they don't, that's the signal!
An oldie but goodie from the past, that I always think about when this comes up, is the US Treasury Bond Fund back in the Fall of 2016. I remember chatting with Liz Claman at the time about it on FOX. The $TLT was consolidating in a classic, textbook continuation pattern above former resistance from the early 2015 highs:
The bet we were making (for many other factors as well at that time) was that this was not a continuation pattern, and instead a massive failed breakout.
Looking at Monthly Charts only takes about an hour per month and is one of the most valuable exercises in our process. By focusing on the long-term, we can filter out the noise and identify what's really happening with a stock, index, etc.
In this post, we wanted to share a few charts that stood out to in May.
Today I want to talk about how important it is to know what's inside the index funds you own. In many cases they can be misleading. Something like the Dollar Index, for example, which is basically 60% Euro, is not exactly the best barometer of the "U.S. Dollar". The Consumer Discretionary Index is 23% Amazon. Stocks like Google and Facebook aren't even in the Technology Index! Combined, $GOOG & $FB actually make up around 40% of the Communications Index.
It's important to know what you own, or what you're analyzing for that matter. When you talk about the S&P500, this is basically they greatest momentum strategy of all time. It buys more of the biggest and best performing stocks and kicks out the worst ones, replacing them with better performers. For me, this is the best large-cap momentum strategy ever created.
Every weekend we publish performance tables for a variety of different asset classes and categories along with commentary on each.
This was a special week as Friday marked the end of May which means fresh monthly candlestick data. Analyzing these long-term monthly charts every several weeks is a great exercise as it forces us to take a step back and identify the structural trends that are in place.
As such, this week’s theme is the continued outperformance over both the short and long-term from those areas sporting the strongest primary uptrends.
Tech $XLK is by far the best performing sector over the trailing year. It is also the 2nd best over the past month and quarter, behind Communications $XLC and Health Care $XLV, respectively. Not surprisingly, these same sectors are also the next best performers over the trailing year.
Friday was a great day in my life. Not only did we get new Weekly Charts, as we normally do on Fridays, but we also got a fresh batch of Monthly Charts to analyze as well. These are all great developments for a team like ours, so driven by data. It's like a little mini-Christmas of data, for us to dive in to.
"Whenever in doubt, Zoom out", is how I learned it. The beauty of Monthly Charts is that it makes it impossible to ignore the primary trends. And that's what this is all about.
I like taking notes when I'm doing my chart reviews, Monthly's or otherwise. Here are a few things that stood out:
First of all, the Nasdaq Composite went out at new all-time highs, US 10yr Treasury Bond Futures went out at new all-time highs, and Gold & Silver went out at new multi-year highs.
My question here is, Who's NOT making money in this environment?
Also on the new all-time monthly closing high list:
